During your working life, you focus on accumulation of assets for retirement. What happens as you approach retirement? How should your assets be allocated? When you need distributions, should you take them from taxable accounts, IRAs or Roth IRAs first? How much in taxes should you have withheld? The answer to these questions is: it depends on your tax situation, risk tolerance, percentage of assets needed for cash flow each year and total investable assets, as well as other factors. You cannot rely on general advice in this area, or you may end up paying much more in income taxes over your retirement life than necessary. Ideally, you will seek help with these decisions before age 70, when mandatory taxation of a portion of your IRAs and qualified retirement plans occurs.
When presented with the appropriate circumstances, we can save retired individuals and couples thousands of dollars in taxes over their retired lives. Some strategies include never wasting a low tax bracket (making partial Roth IRA conversions each year to use up the 15% bracket) and making sure to make the maximum Roth IRA contribution each year that there is earned income (usually this involves a transfer between brokerage accounts and does not affect cash flow). The goal is to move as much money into tax-free assets as possible.
By reducing the balances in your IRAs and qualified retirement plans, you reduce the amounts you will be taxed on after age 70. Someone will be paying taxes on that money when it is withdrawn; all that can be manipulated is the amount of taxes to be paid.
We are income tax specialists, and we initiate these decisions for many of our clients. Proper management of distribution planning can save you thousands of dollars over your lifetime. Why wouldn’t you pursue that?
